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2012 was a year of continued
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Our Environment
At euNetworks we believe that bandwidth changes everything, allowing businesses unfettered access to the resources of our universe. We believe that every business can benefit from bandwidth without limits. I have written in our previous reports about how this can be seen as a contrarian view, but I genuinely believe that the nature of demand that we started to see in 2012 suggested this is less and less the case. There are still those in the ‘bandwidth is the bottleneck' camp, but more and more we see enterprises moving towards fibre based infrastructures. To us, this just makes sense. Elsewhere in this document, and in prior reports, we have spoken about the explosive growth in data. From cloud computing and any number of X-as-aservice offerings through to the exponential growth of mobile data, we see fibre as the key enabler to allow quality delivery of these services. Traditional copper networks just don't have the bandwidth to support these services.
Many shareholders often ask me to try to explain this growth in terms that a layman can understand. In their book ‘Big Data: A Revolution That Will Transform How We Live, Work and Think', Viktor Mayer- Schonberger and Kenneth Cukier offer something of an insight:
"Internet companies have been particularly swamped. Google processes more than 24 petabytes of data per day, a volume that is thousands of times the quantity of all printed material in the US Library of Congress. Facebook, a company that didn't exist a decade ago, gets more than 10 million photos uploaded every hour. Facebook members click a ‘like' button or leave a comment nearly three billion times per day, [..] Meanwhile, the 800 million users of Google's YouTube service upload over an hour of video every second. The number of messages on Twitter grows at around 200% a year and by 2012 had exceeded 400 million tweets a day."
"[...] in 2013 the amount of stored information in the world is estimated to be around 1,200 exabytes, of which less than 2% is non-digital."
"There is no good way to think about what this data means. If it were all printed in books, they would cover the entire surface of the United States some 52 layers thick. If it were placed on CD-ROMs and stacked up, they would reach the moon in five separate piles."
These statistics are what drives our strategy and defines our desire to become Europe's
leading bandwidth infrastructure company.
We seek to deliver a superior customer experience based upon our facilities based network, our commitment to great data and our fantastic people. We seek to be the low cost producer in our space by keeping our production system as lean and as simple as possible. There are many very successful companies that operate throughout the stack in telecommunications, but our focus is solely on being a horizontally integrated company. We had put in place many of the key ingredients for a ‘friction free' operating model in prior years, but 2012 saw the real industrialising of these ingredients into an integrated whole. We manage our business end-to-end in Salesforce and utilise Financial Force to bill directly from the same source data. This is fundamental to our ability to deliver a superior customer experience.
Nature of Demand
euNetworks owns and maintains high density last mile fibre networks in 15 major European cities, with 13 of these in operation. These deep metropolitan networks are the cornerstone of the company. Connecting buildings to these networks is what fuels our business. We have more than 200 data centres (DC) connected to our network and are always striving to add more and more with high fibre count. Our returns on data centre connectivity are such that on average we get payback on the capital employed to connect the site in less than two months. Obviously the further from the network the data centres are, the more costly it is to connect the site. But we are constantly trying to find ways to connect as many as we can because the data to which I referred in the earlier section is stored in these data centres and the ability to access that data is fundamental to our customers. We also have direct connection to more than 600 enterprise buildings in metropolitan markets, with effort focused to continually increase this in line with customer demand. The returns from enterprise buildings are longer than we experience and expect from data centres, but the connectivity from DC to enterprise buildings is increasingly important for all enterprises. We have seen the traffic growth from DC to enterprise buildings double in the last 12-18 months. These trends are crucial. We see DC to DC connectivity demand rocket. We see huge growth in DC to enterprise building connectivity. We see Internet Protocol (IP) based customers moving to Fibre and we see an increasing number of companies move from the more managed service type network offering to fibre infrastructure.
An important metric for us was that which showed our average contract length at 41 months, up from 39 months in 2011. Revenue under contract is an important measure in value creation. We experienced much higher churn in 2012 than we had in the past, averaging 1.5% for the full year. We had expected this churn. When we bought LambdaNet we noted that much of their revenue was not in term, i.e. the contract had expired and was operating month to month. We also experienced churn in our ultra low latency business, euTrade. Again, this wasn't a surprise. It is an incredibly competitive business and we are now seeing competition from microwave based services. However, we are happy with our position in the market and the service we deliver to our customers. We have worked closely with our customers and have implemented a focused renewals programme that leads us to believe that our overall churn percentage will decline over the second half of 2013.
As I noted last year, ultimately what matters to you, our shareholders, is that we manage your investment in euNetworks with care and discipline. We aim to spend as much of our capital as possible on growth and development. This capital expenditure is directly or indirectly related to customer contracts. Whilst our overall capital expenditure fell year over year, the amount allocated to growth grew from 44% to 66%, an increase of more than €4m. Our payback on capital employed for incremental customer contracts was 4 months. We believe the numbers to be among the best in the industry and this represents a key focus for us. It is the heart of our value creation activity. We believe we have a pipeline of activity that means we can continue on this path to generate organic
growth in our business. Whilst we are always alert to inorganic opportunities, 2012 was a year that we have been able to scale our business through the prudent use of capital.
Our people are at the heart of our business and we have an outstanding team that we
have added to during the course of the year. We implemented an intern programme in 2012 that brought a number of great people into our business and hopefully added to their experience in a beneficial way. We are working hard to implement an Apprenticeship scheme in 2013 which will give real 21st century digital economy skills to young people in our community.
I would also like to extend my thanks to John Franklin who is leaving us in 2013. John served as our Chief Operating Officer and built an operational capability in our company of which we are very proud.
Finally, the values we hold as a company are fundamental. They guide the way that we make decisions. However great our assets, our data, or our processes, without everyone in our company living and breathing the same core beliefs, we will never maximise the value we could create. Our values are these:
I consider that we have made a great deal of progress in 2012 and are building a great business for our shareholders, our people and the communities in which we operate. That work will continue and accelerate in 2013. We all thank you for your support.
